# [1984] 3 S.C.R. 118

- **Citation:** [1984] 3 S.C.R. 118
- **Court:** Supreme Court of India
- **Decided:** 1984-03-06
- **Case number:** Civil Appeal No. 3023 of 1980
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1984-3-s-c-r-118-8743
- **Pages:** 44

## Headnote

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TARAPORE.& COMPANY
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. v,
COCHIN SHIPYARD LTD. COCHIN & ANR.
March 6, 1984
. [D.A. DBSAI AND 0. CHINNAPPA REDUY, JJ.J
Arbitration Act 1940 (Act X of 1940) section 16(/)(c), 30 and 33.
.
.
Arbitration-Works
conlract~Construction of BNilding Dock and Repair
Dock-Reference _of specific question 'of law to arbitrator-Arbitrator framing
"issue-Parties agreeing to· issue being decided-=-Award 1f could be set aside on
ground of error. of law on. face of award.
Interpretation:.
Agreement-Works contracr ·of large magnitude-Over-Simplification of
clauses impermissib/e.-Agreement predicated upon and agreed fact silllationSituation ceasing to exist-Agreement to that extent rendered irrelevant and
otiose.
Words & PhraseJ:
.'Without prejudice'-Meaning of-' claim arising out of contract'-'Relating
to the contract'-Meaning of___.;.C/auie 40 General Conditions of Contract.
The appelJant and the resi;>ondents entered into a contract for the construction of Building 1)ock; ·CJ a use 40 _of the General Conditions of Contract
entered into between -the parties, provided that "all questions and dispute\
relating to the meaning of the Specifications Estimates Instructions, Designs,
Drawing-----~nd the quality of the workmenship or materials used in tlte
work or its to any Other questions, claim, right, matter or thing whatsoever in
any way <irising out_ of or relating to the" contract or otherwise concerning the
execution whether arising during the progress of the work or ofter completion-
---shall ·be-referred to the Sole Arbitrator etc~" During the. implefilentation
of the works contract, disputes arose between the parti~s-in respect of a ~laim
for compensation on account of the increase in the cost of imported pile-d~iving
equipment and teclmic31 know-how fees. Correspondence was exchanged 'bet·
ween the Appellant and Respondent No. 1 and the dispute was referred to the
Sole Arbitrator. The polnt referred were: (1) Whether the c1airn of compen·
sation for increase in the cqst of im-portcd pile driving equipinent and technical
know-bow fees would fall within the purview of the first para of clause 40 of the
General .Conditions of COntract ; and (2), if it does, the quantum of con1pensati~n. if aQy~ to which the appeUallt would be ·entitled to. The arbitrator
entered upon the reference and after· hearing the parties. gave bis award. The
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TARAPORE CO. JI. COCHIN SHIPYARD
119
arbitrator hel,d that the appellant was entitled to compensation for the increase
in the cost of in1ported pile drawing equipment and technical know-how fees by
a sum of Rs. 99 lakhs which amount shall be payable with interest@ 9'J/2%
The award was typed orl stamp paper of the value of Rs. 150/-. The arbitratC!r
forwarded the award to both the parties .
. The appellant moved 3. petition under' sections 14 and 17 of the Arbitration
Act, in the Court.Of the Sub.orCinate Judge for filing the award and for making
it a rule of the Court, while the respondent moved a petition ,under sections 30
and 33 for setting aside the award contending that: (-1) the aw"ard was insufficiently stamped, and (2) the arbjtrator had exceeded his jurisdiction by miscon ..
struing clause 40. The s'ubordinate Judge negatived both the coil.tentions. Jt.
was held that the respondent having submitted the question ,..,hether the dispute
raised by the appellant was covered by the arbitration clituse ; could not controvert the jurisdiction of the Arbitrator to decide the dispute ; and the aw~rd of
the arbitrator was modified in the matter of interest frOm 9'1 /2 per "cent as awarded by the ar'Qitrator to 6 per cent, and the award was made a fuie of the
Court.
The respondent preferred an appeal to the Rish Court, and a Division
Bench, agreed· with the Subordinate Judge on the question of insufficiency of
stamp. It however held that the question ·whether th~ dispute was arbitrable or
not could not be finally decided ~Y the arbitrator because it was a matter relating
to-his jurisd

## Text

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TARAPORE.& COMPANY
·.
. v,
COCHIN SHIPYARD LTD. COCHIN & ANR.
March 6, 1984
. [D.A. DBSAI AND 0. CHINNAPPA REDUY, JJ.J
Arbitration Act 1940 (Act X of 1940) section 16(/)(c), 30 and 33.
.
.
Arbitration-Works
conlract~Construction of BNilding Dock and Repair
Dock-Reference _of specific question 'of law to arbitrator-Arbitrator framing
"issue-Parties agreeing to· issue being decided-=-Award 1f could be set aside on
ground of error. of law on. face of award.
Interpretation:.
Agreement-Works contracr ·of large magnitude-Over-Simplification of
clauses impermissib/e.-Agreement predicated upon and agreed fact silllationSituation ceasing to exist-Agreement to that extent rendered irrelevant and
otiose.
Words & PhraseJ:
.'Without prejudice'-Meaning of-' claim arising out of contract'-'Relating
to the contract'-Meaning of___.;.C/auie 40 General Conditions of Contract.
The appelJant and the resi;>ondents entered into a contract for the construction of Building 1)ock; ·CJ a use 40 _of the General Conditions of Contract
entered into between -the parties, provided that "all questions and dispute\
relating to the meaning of the Specifications Estimates Instructions, Designs,
Drawing-----~nd the quality of the workmenship or materials used in tlte
work or its to any Other questions, claim, right, matter or thing whatsoever in
any way <irising out_ of or relating to the" contract or otherwise concerning the
execution whether arising during the progress of the work or ofter completion-
---shall ·be-referred to the Sole Arbitrator etc~" During the. implefilentation
of the works contract, disputes arose between the parti~s-in respect of a ~laim
for compensation on account of the increase in the cost of imported pile-d~iving
equipment and teclmic31 know-how fees. Correspondence was exchanged 'bet·
ween the Appellant and Respondent No. 1 and the dispute was referred to the
Sole Arbitrator. The polnt referred were: (1) Whether the c1airn of compen·
sation for increase in the cqst of im-portcd pile driving equipinent and technical
know-bow fees would fall within the purview of the first para of clause 40 of the
General .Conditions of COntract ; and (2), if it does, the quantum of con1pensati~n. if aQy~ to which the appeUallt would be ·entitled to. The arbitrator
entered upon the reference and after· hearing the parties. gave bis award. The
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TARAPORE CO. JI. COCHIN SHIPYARD
119
arbitrator hel,d that the appellant was entitled to compensation for the increase
in the cost of in1ported pile drawing equipment and technical know-how fees by
a sum of Rs. 99 lakhs which amount shall be payable with interest@ 9'J/2%
The award was typed orl stamp paper of the value of Rs. 150/-. The arbitratC!r
forwarded the award to both the parties .
. The appellant moved 3. petition under' sections 14 and 17 of the Arbitration
Act, in the Court.Of the Sub.orCinate Judge for filing the award and for making
it a rule of the Court, while the respondent moved a petition ,under sections 30
and 33 for setting aside the award contending that: (-1) the aw"ard was insufficiently stamped, and (2) the arbjtrator had exceeded his jurisdiction by miscon ..
struing clause 40. The s'ubordinate Judge negatived both the coil.tentions. Jt.
was held that the respondent having submitted the question ,..,hether the dispute
raised by the appellant was covered by the arbitration clituse ; could not controvert the jurisdiction of the Arbitrator to decide the dispute ; and the aw~rd of
the arbitrator was modified in the matter of interest frOm 9'1 /2 per "cent as awarded by the ar'Qitrator to 6 per cent, and the award was made a fuie of the
Court.
The respondent preferred an appeal to the Rish Court, and a Division
Bench, agreed· with the Subordinate Judge on the question of insufficiency of
stamp. It however held that the question ·whether th~ dispute was arbitrable or
not could not be finally decided ~Y the arbitrator because it was a matter relating
to-his jurisdiction, and that the arbitrator cannot by an erroneous interpretation
or construction of the ~clau:e confer jurisdiction on himself and that the court
can go into the qμestion whether the matter in dispute between the parties was
covered by the arbitration clause_. It finally held tha,t even though the arbitration
clause was very wide, the dispute as to compensation for increase in the cost of
impo_rted pile diiving equipment and technic3.I know-how fees could not be covered by the arbitration clause because under clause 26 every plant, machinery
and equipment had to be provided by the contractor and any ·rise or escalation
in the price Of suCh equip!nent or machinery, cannot be the subject matter of
compensation. by the respondent. The apt)e_al wai therefore allowed, and,.the
trial court's order, ma_kiog the award a rule of the court was set aside and
dir~ted that the award be returned to the parties.
In. the appeal to this Court it was contended on beh'l)f of the appellant,
that though Sec. 16( l)(e) of the Arbitrlllion Act may permit the court to remit
or set aside-the award on the ground that there is an error of law ,ap193.rent on
the face of it, yet where a specific question of law has been referred to the
arbitrator for deci~ion, the fact that the-deci~ion is 'ei-roneous does not make the
award bad on its face so as tO permit its being set aside.. As a specific question
of law touching upon the jurisdiction of the ·arbitrator was speficially referred to
the arbitrator for his decision, the decision of the arbitrator is binding on the
parties and the court cannot proceed to inquire whether upon a true construction
of the arbitration clause, the dispute referred to the arbitrator for arbitration
would be covered by the arbitration clause so as to clothe the arbitrator with the
jurisdiction to arbitrate upon the dispute.
On behalf of the respondent, it was contended that the jurisdiction or the
arbitrator cannot be left to the decision of the arbitrator so as to be binding on
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[1984] 3 s.c.R..
the parties and it is always for the court to decide whether the arbitrator had
jurisdiction to decide the dispute, and that the arbitrator cannot by a miscon-
, structioo of the, arbitration agreement clothe himsClf with or confer upon himself
the jurisdiction to decide the dispute.
Allowing the Appeal ;
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HELD : 1. A specific question of law touching the jurisidiction of the
arbitratOr was specifically referred to the arbitrator and therefore the arbitrator's
decision is binding on ~}le parties and the award cannot be s.et aside on the sole
. ground that there· was an error of law apparent on the face of the award. 1t is
also established that the claim for compensation made by the contr~ctor which
led to the dispute VflS covered by the arbitration clause. The quantum of com~
pensation awarded by the arbitrator .was never disputed nor questioned. [170E·Fl
2. A question of law may fi~ure before an "Brbitrator in two wiys. It may
arise as an incidental point "'.hile deciding the main disput~ referred to the
ar"itratOr or in a given case parties may refer a specific question of law to· the ·
arbitrator for his decision. [137G·H]
Russel : Law of Arbitration. Twentieth Edition p. 22 ,· Halsbury's Laws of
England Vol. 2 Para 623 4th Edition referted to.
3. Arbitration has been considered a civilised. way of resolving disputes
avoiding court proceedings. There is no reason why the parties should be
precluded from .referring a specific question of law to an ar bitratoi for his
decision and agree to be bound by the same. This approach manifests faith
of parties ill the capacity of·the tribunal of their choice to decide even a pllre
question of law. If they do so, with eyes wide open, and there is nothing to •
preciude the parties from doing. sq. then there is no reason why the 'court s4ould
iry to impose its view of law· superseding the view of the Tribunal whose
decision the parties agreed to. abide by. On-principle it appears distinctly clear
that wben a specific question of la"w is referred ~o an arbitrator for -bis decision
including the one. touching upon the jurisdiction of the arbitrator. the decision of
the arbitrator would be bindi'ng on both the pa'rties and it would not be open
to any of the two pafties to wriggle out of it by contendiOg that the arbitrator
cannot clutch at.or confer jurisdictiOn upon himself by mis-construing the arbi ..
tration agree!llent. [I 38E' G J .
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4. If a question 'of law is specifically 1eferred and it becomes- evident
· th;t the parties desired to have a decision on the f!'ecific question from the
arbitrator rather than one from the cOurt, then the court will not i[herferf with
the award of the arbitrator on the ground that there is an error or law apparent
on the face of the award even if the view of law taken. by the arbitrator does not
accord with the view of the court. [147F]
Kelantan Government v. Duff Development Co. Ltd. 1923 All E.R. 349: Re
Kins and Duveen, [1913]-2 K.B. 32: F.R. Absa/om Ltd. v. Great Western
(London)Garden Village Society Ltd., (1933] All E.R. 616; Durga Prasad Chamria
.
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. and Anr. v. Sewkishendas Bhattar and Ors: AIR 1949 Privy Council 334; Seth·
ThawardasPherumalv. The Union of ludia; (1955] 2 S.C.R. 48; M/s. Alopi
·Parshad & Sons Ltd. v. Tbe Union of India, (1960] 2 S.C.R. 783; Champsey
Bhara and Company v. Jivraj Balloo Spinning and Wea~ing Company· Ltd. : Law
Report 50 J.B. 324; Union ofJndia v. A.L. Rallia "Ram., (1%4] 3 S.C.R. 164;
Mis. Kapoor NiloJc.heri., Co-op. Dairy Farm Society Ltd. v. Union of lndia and
Others., AIR 1973 S.C. 1338; N. Chellappafl v. Secretary, Kewla State Electricity
Board & Anr., [1975] 2 S.C.R. 811; Produce Brok@rs Co. Ltd. v. Olympia Oil
and Cake Co. ltd., (1914-15] All E.R. 133; Attorney General For Manitoba
v: Kelly and Others .. (1922) Hll E.R. 68; Hirji Mulji v. CJieong Yue Steamship
Co.Ltd., (1926] All E.R. 51; lfeyman & Anr. v. Dmwins Ltd., (1942] 1 All E.R._
337; Jivarajbhai Ujamshi Sheth & Ors. v. Chiniamanrao Balaji & Anr., (1954] 5
S.C.R. 480; Dr. S.B. Dutt v. University of Delhi., [195,8] S.C.R. 1236; referred
to.
5. The expression 'Without prejudice' carries a technical meaning depending upon the context in which it is used.
An action taken without prejudice
to· one's right cannot" necessarily mean that the entire action1 can be ignored, by
the party taking the same. [148F-G]
In the instant case, i'n the context in which the expressio·a iwithout prejudice9
is used, it would only mean that the respondent reserved the right tO contend
before the arbitrator that the dispute is not covered by ihe arbitration clause .. Jt
does not appear that. what was a contention ·that no specific question
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specifically referred to the arbitrator, On a. proper reading of the corresporidence, and in the setting in which the term 'wiihout prejudice' is used; it only
means that the respondent reseived to itself the right to contend before the
arbitrator that a dispute raised or ,the claim made by the contractor was not
covered by the arbitration clause. N9 other me" '1•.ng :can be assigned to it.·
[1480-E]
6. In works contract of such magnitude, and which have been ·undertaken
by an Indian Contractor for the first time negotiations prior to the finalisation of
the contact and the correspondence leading to the formation of cOntract supply
the basis· on which the contract was finally entered into. Undoubtedly, if in the
final written contract, .thei:,.e is something contrary to the basic understanding
_ during the formative stage of the contract, the written contract would prevail.
Buf if the co"ntract does not indicate to the contary and the assumptions appeared to be the found{ltion of the contract, that aspect cannot be overlooked while
determining what were the obligations· undertaken the formal contract.
[151U-!52Bl
7. Over-simplification of the clauses of the contract involving works of
large magnitude is impermissible. kThe whole gamut of discussions, negotiations
and correspondence must be taken into consideration to arrive at a true nicaning
of what was agreed to between the parties. [156F]
In the instant case, there is no room for doubt that the parties agreed that
the investment of the contractor under this head would be Rs. 2 crores and the
tendered rates were predicated upon and co-related _to this understanding. [156G]
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8.
When ~ri agreeme~t is predicated. upon an agreed fact situati~n, if the
latter cea5es to exist the agreement to that extent becomes irrelevant of otiose.
[1560]
9. Phrases suGh as 'claim arising out of contract' ot. 'relating to the con·-
tract'· or 'Concerniti:g the cotract' -on proper construction would mean that if
whiie·intertaining or rejecting the claim or ihe dispute in relation to claim ma:Y
be entertained or rejected after reference 10 the contract, it is a claim arising out
of contract. The· language of clause 40 shows that. any claim arising out of the
contract -iri relation to estimates made in the contract would be covered by the
arbitration clause. If it becomes necessary to have recolirse to th6 contract to ·
settle the di~pllte One way or the other then certainly it can be said that it is a
dispute arising out of the con"act. [157F-G]
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In the instant case, the .arbitration clause is so widely worded as disputes
arising out of .the contract. or in relation tq the cont'ract or execution of the·
works that "it would comprehend, within its cOmpass a claim for cOmp·ensation related to estimates and arising out of the cOntract: [157H]
·"""'(
10· (i) A dispute, the determination of which turns on the true construction
of the contract,.. wou!d also seem to. be a dispute under arisin~ out or.:or concerning the contract. The test is tf\at if in setling a dispUt~, a reference to the
contract is necessary, such a dispute would be covered by. the arbitration
clause. [158D-E]
A.M. Mair & Ca. v. Gordhandas Sqgarmu/l., [1950] S.C.R, 792; Ruby
Gef!eral Insurance Co. Ltd. v. Pearey' Lal Kumar And Another; [1952] S.C.R.
501; referred to.
ii. Where the parties .are at one· in asserting that they entered into a
bindin.s contract, but a difference has aris~n between them whether there bas
been a breach by one side or the other, or whether circumstances hnve arisen
which have dischar.ged ·one ··or both parties from ~further petformance; such
.differences should be "regarded as differences which have arisen 'in.respect of' or
'With regard to' of 'under' the contract, and an arbitration clause which uses
these, or similar expressions should be contrue~ acc0rdingly. "[1~9B-~]
Union of India v. Salween Timber Construction (India) & Ors., [1969] 2
S.C.R. 224; Heyman & Anr. v. Darwins Ltd., [1942] A.C. 356 at 366; Astro
Vencedor Co1npania Naviora S.A. of. Panan1a v. Mabanaft G.M.8.H. The
Diamianos., [1971] 2 Q.B. 588; Gunter Henck v. Andre & CIE. S.A., [1970] 1
Lloyd's Law Repoi:ts 235; referred to
In the instant case, from the pleadings, it clearly transpires that both the
parties had recoutse to the contract. It is satisfactorily established that the.
claim made by the contractor would be covered by the arbitration clause. [160B]
tARA!'oRE Co. V•COCHIN SHIPYARD (Desai J.)
123
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3023 of
1980.
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Appeal by Special leave from the Judgment and Order dated
the 21st August, 1980 of the Kt;rala High Court in M.F.A. No. 409
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of 1979.
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F.S. Nariman,
A.N. Haksar, · T. Raghvan, R.F. Nariman,
V.A. Bobde & K.R. Nambiar, foi"the Appellant.
G.B. Pai, P.K. Kumar,
A.K. Sharma,
As/wk Mathur and
Pa~veen Kumar for the Respondent.
The Judgment of the Court was .delivered by
DESAI, J. In this appeal by. special I.eave a very interesting
.,_
question ih the field oflaw of arbitration which 'honest man dread
more, than the dreaded law suits' arises for our c~nsideration.
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First respondent Cochin Shipyard Limited ('respondent' for
short) invited tenders for construction of Building Dock at Cochin.
As there was only one ~tender that of Tarapore & . Company,· the
appellant, the respondent called fresh tenders somewhere in July,
1971. In December, 1971; the respondent invited tenders for construction of a Repair Dock also at Cochin. There were two. tenders
for Building Dock; namely, one of the appellant and one by
M/s National Building Construcfion Corpbration, a Government
oflndia undertaking, the value of the tender Of the latter being ·
double that of the appellant. For the construction of the Repair
• Dock, the only tender was of the appellant.
1n view or th~ limited
nuinber of tenders. received, · the appellant was invited to negotiate
the terms of tender. The v_alue of the works to be executed was
·over Rs. 24 crores. In view of the huge investment in the project,
the tenders were examined by a committee called the Tender Committee conslituied in accordance with the approval of the Ministry
of Shipping and Transport for examining and evaluating the tenders
r~ceived for the Building Dock and the Repair Dock. The Tender
Committee taking note of the poor response to the invitation to
tender and costiy affair decided to accept the tender of the appellant inter alia for the ·reasons (i) that works of such complexity and
magnitude have not bee.n undertaken before by any Indian contrac-;
tor, (ii) that the plant and equipment required for the work are not
available indigenously, (iii) that if the contractor is to procure the
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specialised equipment · r~quired for this work, there ·is hardly any
assurance that after these works are over, he would find any substantial use for the sai:ne, (iv) that excavation. and subsequent cons-·
tructio~ involve de-watering which introduces considerable ·amount
of uncertainty and th~t during the discussions; the apprehension of
the tenders of this kind was· voiced and noticed by' the Committee,
.and (v) that RCC Piling also requires .highly skilled and complex
technical . operations and it involves .. a large eiement of risk and
uncertainty in the· work.
Both the tenders of the appellant were
. accepted, and contracts were entered into between the parties." Both
the parties while entering into contracts. were aware anc\ conscious
~ of the fact that equipment and technical know-how would. have to
be imported involving a huge outlay of foreign exchange. Appellantcontractor quoted rates . on t.wo aiternative basis depending-upon
whether it had to import equipment and know-how at its cost invol- .
ving Rs. 2 crores in foreign exchange or the equipment ·and knowhow wer.e tci be imported by the respondent at.its ·cost and made
available for use of the appellant in which case the appellant would
be liable t.o pay hire charges for the pile. driving plant at the rate of
Rs. 23/- per metre of ·600 mm· dia. RCC cast-in-situ pipe' and
Rs. 16/- per metre of 500 mm di:\.
RCC cast-in-situ pipe and at the.
rate of 300 per .tonne, of steel sheet· piies driven to be recovered
' from the running bills payable to the appellant.contractor. The -
E · ·.
appellant was gjven to understand b:t a. note in the invitation to
• tender that foreign exchange in yen credit to th;: tune of Rs. 38 lacs
is earmarked for the purchase of construction equipment, accessories
etc. from Japan for works of Building Dock, Repair Dock1 the three
Quays etc. On January 24, 1973, work· order for Building Dock
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and Repair Dock was .issued. by the respondent in favour of appel-
. !ant and in this .work order as recommended by the Tender Committee, the respondent adopted the' alternative B as set out iri the ten-·
der, namely, that the contractor was to procure the equipment and
know-how at a cost of about Rs. 2 crores in foreign exchange. In
order.to make this aspect specific, ·additional condition No. 31 was
incorporated in the works order in order to provide for the expense
· to be illcurred and the amount of foreign exchange needed for im~
porting equipmept and technical kllow-how, relevant portion . of
. '
.wl!ich reads as under :
'
"Requisite foreign exchange, for importing piling plant ·. · ·
>>and machinery, spares, technicaf, know-how· and> hiring of
experts necessary for both the.Dock Works vide Work Order ·.
No. 130l9/l/71-W-II dated Janual'J 24, 1973 for Building.
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TARAPORECO. v. COCHIN SHIPYARD (Desai J.)
125
Dock etc. and· Work Order No. 13012/15/71-W-II dated
January. 24, 1973 for Repair Dock. etc., amounting to about
Rs 2.00 crores in all wiUbe made availa\>le to the contractor
f~om the 11th Yen Credit subject to his getting indigenous
clearance and providing detailed justification. The details
of such procurement shall be·fnrnished by the t:ontractor as
soon as they are finalised."
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In view of the huge investment, it was agre.ed that the respondent would make an.advance payment of75% of the value of old
. machinery and 90% of the value of new machinery brought to site
by the Contractor and in -0rder to secure this advance payment,
equipment would be hypothecated by the Contractor (o the respon- ·
dent and the advanoe payment were to carry interest at 9.1/2% p.a.
on the outstanding balance of advance. The mode of recovery was
also specified. The formal contract was signed on January 29, 1973
which included an arbitration clause to which we would turn a
little later.
· It so happened that the required pile driving equipment including the technical know-how against 1 lth Japanese Yen credit were
not available. The respondent also made inqulres in this behalf,
but without 'success. Ultimately, International Foundation Group,
Holland agreed to provide the rate of equipment conforming more
or less to the same specification for which clearance.was sought and
received. from the Government of India. After the respondent •
certified that the equipment and know-how ofiei:ed by International
Foundation Group. Holland conform to the earlier cleara11ce and
that the same equipment being not indigenously available or against
11th Japanese Yen Credit, the respondent requested the Government of India to give necessary clearance to the appellant to import
the equipmeat. This approval was received on Septembet 1, 1973
and the foreign exchange to the extent or Rs 211.80 lakhs equal to
9,4%2.700. Dutch Florins was released in favour of the appellant.
The entire imported equipment was received in four consignments
between March/July 1974. During the intervening period, there
were variations in the rate· of exchange and therefore the foreign
exchange cost of equipment alone in· terms of rupees worked ~ut at
Rs. 177.50 lakhs and of the technical know-how fees payable in 11
instalments worked out at Rs. 105 lakhs. The custom duty went
up by .Rs. 21 lakhs as a consequence of the increase in rupe_e value
• 0f the imported equipment in terins of Dutch F1orlu,
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The appellant made .a tentative claim in the amount of
Rs. 61.27 lakhs from the·respondent on account of increase in cost
of pile driving equipment and technical know-how fees on the
·ground that the contracto{ was entitled to be compensated by the
respondent foi,)he same. In. the letter dated May 28,1975, the
appellant bas stated that the 'tendered rates were. based on certain
total cost of machines which has since gone up considerably rendering the rates no longer workable. The l&l'Pellant' had .provided for
a cost of I 50 lakhs of rupees for the equipment and ihe life of the
equipment was !akin as 12,000 hours and its probable period of
engagement on this job was taken as 8,000 hours. ·On this basis'
two-thirds of the cost of the equipment will be written off by way
of depreciation on this job.' ·It was also stated that there is an
increase in the fees for the technical know-how.
The letter concluded by saying that the loss sustain.ed by the appellant upto May
15,1975 on account of variation in the rate of foreign· exchange was
Rs. 61,27,'3!7 and requested the'.respondent to compensate the loss
aileast upto the tune of Rs. 45 lakhs which is approximately 75%
of the loss suffered by the contractor in this behalf. The respondent
'responded to this letter as per its letter daied July 2,1975 saying
· that the letter dated July 14,1972 of the appellant which forms part
of the contract documents clearly recites that the total foreign ex-·
change required by the contractor for the equipment, spares, technical know-bow. and hiring of exp~rts, was expected to be about Rs. 2
crores and that the expenditure incurred by the contractor in this
behalf. so· far has been less· than Rs. 2 crores and in the circum-
.stancesit was found difficult to accept the position that the tender
was based on the assumptions indicated in the letter under reply
and that the rates for the pile driving should for the future he revised. there ensued further correspondence between the parties.
Ultimately, the appellant by its letter dated March 1, 1976 informed
the respondent that its claim for compensation for increase in the
. cost of imported pile driving eqμipment and technicai know-how
fees has not been entertained for over a year. It was further stated
that 'inasmuch as the dispute has thus arisen between us re&ardiflg
the above claim, we are invoking the provisions for arbitration in
our contracts and ret;erring this dispute to arbitration.' On March
·17, 1976 Chief Engineer of the respondant replied saying that the
matter as set out in the letter dated March 1,1976 invoking arbitration clause is receiving tlieir immediate attention and the appellant
will hear shortly in this be))alf. On March 29,1976, the respondent
wrote to the .appellant denying the claim for compensation of the
appellant. Simultaneously the 'respondent framed three point8
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127
covering the dispute so raised for reference to and decision by the
arbitrator. The letter also sets out as required by Clause 40 a panel
of three names from which anyone can be chosen by the.appellant
as the sole arbitrator. The appellant by its letter dated April
1~19_76 :Vhile refuting the contention of the respondent that the dispute would not be covered by Clause 40 i.e. arbitration clause in
the contract, stated that the proper course would be to.refer the
· dispute that has arisen betwee.n the parties' to the decisfon of the
a.rbitrator a11d not any particular issue or issues.
Ultimately froni
amongst the three names indifated by the respondent the appellant
selected .Shri C. Srinivasa Rao, Chief Bridge· Engineer, Southern
Railway, Madras to be the Sole Arbitrator to tlecide the dispute.
On receipt of this letter the respondent referred the dispute to Shri
C. Srinivasa Rao as Sole Arbitrator. While referring the dispute to
the sole arbitration of Shri C. Srinivasa Rao, the respondent retained the three points of reference set out in the letter dated March
29,1976 but added one more. The· Arbitrator entered upon the reference on June 2,1976. On being called upon by the Arbitrator,
the appellant filed its statement of claim on June 19,1976. The
appellant claimed Rs. 2,03,47,.266 ·as per th., Schedule to the Statement of Claim on account of increase in the cost of·eq'uipment and
technical know-how fees. The respondent filed its reply to the
Statement of Claim on July 19,197,,
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The·points/disputes referred by the parties to the sole arbitrator read as under ;
"!. Does the claim ·of Messrs. Tarapore & Co. on
Cochin Shipyard Ltd., for compensation for increase in the
cost of im,Ported pile driving equipment and technical knowhow fees referred to in clauses (2) and (3) hereunder fall
within the purview of the first paragraph of Clause 40 of the
General Conditions of Contract entered into between the two
parties ?
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2. If the answer to (1) above is in the affirm~tive, in
terms of the provisions· of the contract are Messrs .. Tarapore
& Co. entitled to compensation for increase in the cost of im-
. ported pile driving equipment and technical know-how fees
to be paid to them by Cochin Shipyard Ltd.? If so, what ~s
the amo11nt ~
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3. The dis1mte t.hat has arisen between Messrs. Tarapore & Co., and Cochin Shipyard Ltd.· regarding the claim
·of M/s. Tara pore & Co., for compensation for increase in
the cost of the imported pile driving equipment and the technical know-how fees.
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"Costs'~
Parties appeared before the Arbitrator through their respective
counsel. The Abitrator gave its Awatd on July 6,1977. On Point
No. 1, the Arbitrator' held as under:
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"The claim· of Messrs. Tarapore and Company on
Cochin Shipyard Limited for compensat.ion for increase in
the cost of imported pile driving equipment and technical
know-how fees falls within the purview of the first paragraph
of Clause 40 of the General Conditions of Contract entered·
into between the parties."
On Point No.· 2, the Arbitrator . held that the appellant.
'Messrs. Tarapore and Company are: entitled to compensation by
the Cochin Shipyard Limited for the increase in the cpst of i111ported pile driving equipment and the.. technical know-how fees by a
sum of Rs. 99·1akhs only which amount shall be payable with interest at 9.1/2% per 'annum from this date till date of payment or
decree, whichever i~ earlier'. On Point No. 3, the decision recorded
was 'that it jg covered by the decision on Points (1) and (2)'. On
Point No. 4, on the question of costs, the Arbitrator having determined his fees and incidental expenses directed both the parties to
·bear the same eq:ually. '(he Award was typed on a stamp paper of
the valμe of Rs .. 150/- at Madras. j3y his letter·dated Nil July, 1977,
the Sole Arbitrator foFWarded the award to both the parties."
The appellant moved a petition under Secs. 14 and 17 of the
Arbitration Act in the Court of the Subordinate Judge, Ernakulam
for filing the award and for making it a .·rule of the court. On
October 7;1977 the respondent moved O.P. 81 of 1977 being a combined petition under Secs. 30 and 33 of the Arbitratioo Act before
the Subordinate Judge, Ernakulam praying for setting aside the
award. · The prayer for setting aside the award was fonnded on two
groui1\ls; {l) that the award is insufficien!lY stamped and (2) that the
fl,r1;>itrator has exceeded ·bis iuriuliction by misconstruin(l Clause 40
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TARAPORE co. v. COCHIN SHIPYARD (Desai J.)
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of the General Conditions of Contract (Arbitration clause for
short),
The learned Subordinate Judge noted the fact that the award
was originaJly engrossed on a stamp paper of Rs. 150/- but before
filing the ·award in the court on 'August 4, 1977, the Arbitrator on ·
August f,1977 affixed additional stamp of Rs. 14,722.50 p. which
would be the requisite stamp under Art. 12 read with Art. J 4 of the
Kerala Stamp Act. .The learned Subordinate Judge accordingly
negatived the contention of the .respondent that the award was
insufficiently stamped. On the second point, the learned J~dge held ·
that the respondent having subn:iitted the question whether the dis-'
pute raised by the appellant was covered by the arbitration clause
cannot be permitted to controvert lhe jurisdiction of the Arbitrator
. to decide this dispute and accordingly, negatived the. contention of
the respondent. The learned Judge after modifying the award of
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the Arbitrator to 6% granted the application of the applicant and .
made the award a rule of the cpurt.
The respondent preferred M.F.A. 409 of 1979 in, the High ·
Court of Kerala at Ernakulam. A Division .Bench of the High
Court agreed with the learned Subordinate Judge on the question of
insufficiency of stamp.· The Division Bench however, after exl?ressing- its displeasure about not making a reasoned award by the
Arbitrator proceeded to examine the C()ntent.ion whethei; the arbitration claUfe covers the dispnte. The court held that the question
whether the dispute is arbitrable or not cannot be finally decided by
· the arbitrator because it is a matter relating to his .jurisdiction. It
was further held that the arbltrawr cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and the court c.an go into the question whether the matter in
disp)lte between the parties is covered by the arbitration clause.
· The specific contention ort behalf of the appellant that once a specific question of law is referred to the arbitrator, the parties are
bound by the de.cision of the arbitrator was negatived by the ·High
Court ·and it was held that as the reiipondent has joined arbitration
under protest, it was not estopped from contestinjl the question and
the award is not binding Qn it if it can be shown that the arbitration
agreement did not cov.er the dispute raised by the appellant. The
court finally held that even though the arbitration clause was very
wide, the dispute as to the compensation for increase in the cost of.
imported pile driving equipment an<l technical kn_ow·how fees woutd·
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not be covered by the arbitration clau>e inter.alia on the ground
that by Cl. 26 of the General Conditions of Contract every plant, .
machinery and equipment had to be provided by the contrator and
any rise nr escalation in the price of su.ch equipment or machinery
cannot be the subject matter of compensation by the respondent.
Accordingly, the appeal of the respondent was allowed and the
)ud$ment and order of the trial court making the award rule of the
court was set aside. The court directed that the award be returned
to the parties: Hence this appeal by the contractor by special
· Jeave.
Before we advert to the rival contentions, it would be advantageous to refer .to the arbitration clause being Clause 40 ~of the
General Conditions of Tender subject to which the contract ;vas
entered into, the relevant portion of which reads as Ul)der ;
"Clause 40.
Except where otherwise provided in the
contract, all questions and disputes relating to the meaning
of the· Specifications, Instructions, designs Drawings hereinbefore mel)tioned and as .to the quality or workmanship or
materials used on the work or as to any other questions,
claim, right, matter or thing whatsoever in any way arising
out of or relating to the Contract, Designs, Drawings, Speci,
ficatioqs, Estimates, Instructions, Orders or these conditions
or otherwise concerning the works or the execution or failure
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to execut.e the same,. whethe.r arising during the progress of
the work Qr after completion or abandonment thereof shall,
after. written notice by eitJ;ier party to the contract, to the
either of them, be referred to the .Sole Arbitration of a person appointed by the Chief Project ,Officer of the Cochin
Shipyard Project or the Administrative Head of the Cochin
Shipyard Project at.Jhe time of such appointment by whatever designation known, from a panel of names given in
Annexure II."
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Over and above the extfacted portion, ·the clause provides for
the manner and metho'd of appointing tlie sole arbitrator, the continuance ofthe work during progress of arbitration proceedings, the
.time and place of holding the arbitration proceedings, the power to ·
enlarge the period for making the award and finality to be attached
· to the award of the Arbitrator.
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TARAPORE co. v. COCHiN SHIPYARD (Desai J.)
131
When the arbitration clause was invoked by the appellant, the
respondfnt did contend that 'the dispute raised by the appellant was
not covered 1!J the arbitration clause. After. specifying its demur,
the respondent formulated the points in dispute on which the
arbitration was invited to give his award. Undoubtedly, the respondent proceeded to formulate the points in dispute betwee.n the
parties on which the Arbitrator was to be invited to give his award
without prejudice to its right to contend that the dispute is "not
. covered by-the arbitration clause and that the appellant is .not enti-
~led to any compensation in respect of the increase in the cost of
imported pile driving equipment and technical know-how fees. What
is the eifect of referring the specific question of law to arbitration
without prejudice to one's right to co(itehd to the contrary will be
presently examined. The fact remains that on the. dispute arising
out of a claim for compensation on account of the increase in the
cost of imported pile driving equipme~t. and technical know-how
fees, the respondent agreed to refer the dispute under two specific
heads to the Arbitrator. The dispute so raised have already been
extracted. Briefly stated they are : (1) whether the claim for compen~tion would fall within the pμrview of the first para of the
arbitration clause and (2) if it does the quantum of compensation,
if any, to which the appellant would be entitled.
Analysin~ the dis,
puies, let it be made distinctly c!eAr th~t the appellant asserted that
its claim for compensation would be governed by the arbitration
clause and the same wa• specifically denied by the respondent saying
that t\Je claim would be beyond the pμrview of the arbitration
claus;.· On these rival positions, the specific issue was framed
whether the claim for compensation would fall within the purview
of the first part of the arbitratoin clause. This:was the specific dispute
referred to the arbitrator inviting him specifically to decide this
dispute. If this issue specifically .raises a question as to jurisdiction
of the arbitrator to arbitrate upon the dispute set out in Point No.
2, it appears to have 'been specifically referred t.o the Arbittator for
his decision. Parties, therefore, agreed to submit the specific ques- ·
• tion even with· regard to ·the scope, ambit, width and the construction
'of the arbitration clause so as to define its parameters and contours
with a view to ascertaining· whether the claim advanced by the
-appellant and disputed by the respondent would be covered by the ·
. arbitration clause. Whether. upon its true construction.the arbitration clause would include within its· compass the dispute thus raised
between the parties was specifically put in issue because parties were
at varian~e about i\. 'Appellant asserted that its claim to compensation would form the subject matter] of ·arbitration under Clause 40
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and the respondent contending to the contrary. · While deciding
this dispute, as to th~ scope, width and ·ambit of arbitration clause
vis:a•vis the dispute raised, it is not necessary to decide whether the
Claim was tenable justified or had any substance in it. 'fhat would
fall within the second point of reference to the arbitra,tot which
opens with a sp~ific 'clause that it needs onJy to be de.cided if the
answe.r to the first point of reference, namely jurisdiction· of the
arbitrator under Clause 40 is in the affirmative meaning thereby
that the.dispute so,;aised and
sub~isting between the Nrties-would
be covered by the arbi~ration agreement. In other words, if the
dispute is covered by)he arbitration agreement, the arbitrator was
further required to decide whether there was any substanc;, in the
claim made, and if he found some substance in the disputed claim,
to ascertain what amount the appellant would be entitled to recover
as and by way of compensation from the-respondent. The arbitrator
was thus required and called up0n first to decide whether the dispute
is arbitrable as falling witlfin the width and ambit •or the arbitration .
agreement. If the answer is in the affirtnative, then alone the second,
point need be examined.